Saudi Arabia's Continuing Efforts to Promote Private Sector Investment
Institutional Changes 
and the Privatization Challenge
 
 

 


International Development Consultants, LLC

 

 

Overview

This article examines recent institutional and project development trends in Saudi Arabia’s new push to have greater role for the private sector in the future economic development of the Kingdom.  As discussed below, recent developments at the new cities of Jubail and Yanbu are an important part of these new initiatives.

A brief overview of the Saudi economy is presented followed by a review of recent institutional changes, project development trends and observations on the great opportunities and challenges ahead for the Kingdom.

 

About the Author:  Dr. J. Michael Cobb, worked extensively in Saudi Arabia in the early 1980's and later in the mid 1990's, especially on the planning, development finance and implementation of Jubail Industrial City, while serving as a senior manager and consultant with the Saudi Arabian Bechtel Company and the Royal Commission for Jubail and Yanbu.

 

Economic Background  

The Saudi economy is currently dominated by massive state corporations which account for about two thirds of the Kingdom’s GDP.  These include firms such as Saudi ARAMCO, the Saudi Basic Industries Corporation (SABIC), the Saudi Electricity Company (SEC), the Saudi Telephone Company (STC) and the Saline Water Conversion Corporation (SWCC).  One should remember, however, that prior to the Kingdom’s great oil boom in the 1970s, most of these companies, including ARAMCO, were privately owned.

Due to the increasing levels of public debt in the Kingdom, combined with declining public capital expenditures and generally lower levels of real growth in the economy, the government is refocusing its policies toward increasing the private sector role in country’s economic development. Key leaders such as HH Prince Abdulla bin Faisal bin Turki Al-Saud, Governor of the Saudi Arabian General Investment Authority, have recently stressed the important role that privatization could assume in spurring local private investment as well as greater foreign direct investment. 

Other advantages of increased privatization include retirement of major portions of current public debt, reductions in future public debt and state subsidies, innovations in new management and marketing techniques and the potential repatriation of significant levels of Saudi private capital currently invested abroad.

Until recent policy changes, which are discussed below, the Saudi government’s efforts in privatization were mainly involved in permitting private management of port and airport operations and the provision of education, health and some postal services is support of the primary government entities. However, outright sale of existing state assets has not yet occurred. 

There is movement toward greater privatization, however, in the electric power sector, as is discussed below.  Actions toward state asset privatization for other sectors is much slower.  SABIC has been 30 percent private for many years, and was constituted to be eventually completely private although most observers say this unlikely anytime soon.  As for Saudi ARAMCO, the Kingdom’s primary asset, there has been no public mention of even partial privatization of any of its horizontal or vertical entities. 

Other areas often cited as privatization candidates include various municipal services (as discussed below for Jubail and Yanbu), the national airline, hotels, various distribution facilities and more private shareholders in state banks.  For substantial private sector involvement to occur, however, fundamental changes in the Kingdom’s institutional structures were required.  The following section outlines these significant recent changes.

 

Recent Key Institutional Changes

Saudi Arabia announced a significant new Kingdom-wide investment promotion and development system in April 2000.  Culminating several years of work by the government and the private sector, the new system seeks to transform and improve the Kingdom’s development strategies and priorities, especially focusing on initiatives for accelerating private sector investment and development in the country. This new private sector focus is a key investment component of the official 2000-2005 Kingdom development plan and is also a key component of the country’s WTO membership strategy of attracting up to $200 billion in foreign investment during the next 20 years. Below is a brief overview of these new private sector focused Institutional changes

Supreme Economic Council

In August 1999 King Fahd established the new Supreme Economic Council headed by Crown Prince Abdullah.  This new body, which includes representatives from the private sector as well as government, , is charged with developing the new economic strategies for the Kingdom as well as will insuring the  legislative changes needed for their implementation.   

Supreme Petroleum Council

Recognizing the importance of energy to the Saudi Economy, in January 2000 King Fahd then established the Supreme Petroleum Council.  Their mandate is to oversee the development of new strategies regarding the Kingdom’s role in world oil markets and OPEC as well as developing new strategies for opening-up of private sector investment opportunities in the energy sector, particularly for natural gas which is not only a fuel source but also the key feed stock for the Kingdom’s petrochemical industry. 

Foreign Investment Law

The Kingdom’s new Foreign Investment Law is one of the key initiatives taken by the new Supreme Economic Council.  Adopted by the Council of Ministers in April 2000, the new Foreign Investment Law  now permits 100 percent foreign-owned ventures having  the same privileges, incentives, and guarantees as Saudi-owned ventures. 

Business applications and permitting are also being streamlined in that the basic government assumption is they will be promptly approved.  The Law requires all new investment applications be handled within 30 days from the time required documents are submitted.  If there is no action to disapprove during this period, the investment initiative will be registered as approved. 

Opening of the Saudi Stock Market

A related major change by the Supreme Economic Council in late 1999 was the opening up of the Saudi stock market to foreign investors.  Previously, only Saudi citizens were allowed to own individual securities, and Saudi mutual funds allowed only foreign investment from neighboring Gulf Cooperation Council (GCC) states. However, the new regulations allow international investors share access to twelve (12) mutual funds operated by various Saudi banks, with many thinking that the  individual stocks ownership by soon follow.

Saudi Arabian General Investment Authority

In a related separate April 2000 decree, the new Saudi Arabian General Investment Authority (SAGIA) was established.  Under the direction of Governor HH Prince Abdulla bin Faisal bin Turki Al-Saud, SAGIA forms a one-stop investor support agency, specifically the Comprehensive Service Center (CSC), charged with insuring an efficient approvals process while also promoting new investments. 

The previous investment promotion agency, Saudi Consulting House, was dissolved with its functions restructured into the CSC.  SAGIA incorporates and coordinates all of the various investment focused branches of the government and also includes representatives from the private sector sitting as full members on the Board.

 

The Saudi Electric Company

In February 2000 a merger agreement was signed among Saudi Arabia's 10 existing power companies. This included the four critical "SCECO"'s (West, East, South and Central) which together controlled about 85% of the Kingdom’s power supplies. Later in April 2000 this merger resulted in the much anticipated Saudi Electric Company (SEC), a  joint-stock company 50% owned by the Saudi government. 

The establishment of SEC appears to offer the potential for eventually splitting off separate companies for power generation, transmission and distribution and for private sector construction of plants under various BOT models. However, no one minimizes the challenges remaining to be resolved over issues of taxation, the underlying legal and regulatory frameworks, fuel supply and power purchase agreements and other operating concerns.

For many years the four SCECO companies operated at a loss due to inefficiencies, non- payments by customers and requirements to sell power at below cost to Saudi consumers. The new SEC was to correct these difficulties. With a promising beginning, in April 2000 the new company increased power tariffs to major power customers.  However, this was short lived.  Due to the resulting widespread criticism, by early October 2000 these rate increases were rescinded, an action viewed by many as a move away from reform of the power sector and possibly a move away from privatization in the Kingdom generally.

 
Our View
An Important Shift In Emphasis

We consider such an assessment from the SEC actions, however, premature, especially in light of more recent developments employing new financing mechanisms and public-private initiatives in the Kingdom.  For example, Ghazlan II is a $1.7 billion Eastern Province power project being financed with a $500 million commercial syndicated loan, a first in Saudi Arabia. Also, in October 2000 plans were approved for a SF 2.5 billion Saudi Joint Stock company, the Power and Water Utility Company for Jubail & Yanbu, or MARAFIQ. 

Shareholders include the Royal Commission, Saudi Aramco, the Public Investment Fund, SABIC and local private investors.  MARAFIZQ will take over management, operations, maintenance, and expansion of power, water, wastewater, seawater cooling and related utility infrastructure needs for current and future growth of the two industrial cities.  The new utility also will take over leases on the existing facilities and will own them outright at lease expiration.

 

Summary

Over the last thirty years, most of the opportunities that Saudi Arabia had to offer the business world involved government contracts.  Although these will continue, the government indicates that most of the newer opportunities will involve private sector investment and new private business ventures.  The great state funded mega projects and investments of the past 30 years were essential in providing the underlying infrastructure base for the Kingdom. 

These national investments were successfully accomplished and the platform is now there for supporting the further development of a modern economy where the private sector takes a major role.  With globalization of the world’s economy and great technological and communication capabilities becoming increasing available to people everywhere, however, Saudi Arabia continues to face great external as well as internal challenges. 

These challenges include their role in being a key stabilizing force in the often volatile political area of their neighboring Gulf States as well as in the larger Middle East region.  The Saudi are also faced with integrating the great global economic, technology and communication forces into their country while upholding and strengthening the important social, cultural and institutions values forming the foundations of the Saudi Arabian society.  Our view is that the Saudi people will continue to successfully meet these great challenges.

 
Selected Sources
 
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Arab News, March 23, 1993; Saudi Arabia Survey: Oil Policy and the Private Sector. Financial Times, Jan. 30, 1992; 15 Years of Development, Jubail Development Review, Vol. 7, No.2, Dec. 1992, Investment Promotion Department, Jubail Directorate, Royal Commission for Jubail and Yanbu; Information on Jubail Industrial City: A Place for Industry, Economic Development Department Brochure, Jubail Directorate, Royal Commission for Jubail and Yanbu, 1990; Saudis Turn Desert Into City, New York Times, Feb. 17, 1987; Bechtel's Master Builders, Time, July 12, 1982; Vast Saudi Gas-Gathering System Moves Into Final Phase, Oil & Gas Journal, Apr. 12, 1982.
 
 
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